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Buy-and-Hold Giants Are Killing Trading in Peru Stock Market

Buy-and-Hold Giants Are Killing Peru’s Stock Market Liquidity

(Bloomberg) -- Peru’s capital markets are drying up and the drop-off in trading is leaving the country at risk of losing its coveted emerging-market status with a downgrade to frontier.

Equity trading on the stock exchange has tumbled 41% since 2012 to $3.6 billion last year, a pittance compared with regional peers such as Colombia and Chile. While the currency and corporate bond markets are somewhat more active, they also suffer from a dearth of volume.

It’s a sensitive subject for Claudia Cooper, who’s entering her second year as head of the Lima Stock Exchange with a mandate to turn things around. She’d prefer to talk about the surge in so-called factor investing at the local bourse, or the efforts undertaken to make it easier for real estate investment trusts to list shares. But when pressed, she acknowledges the overwhelming concern that a lack of trading will compel MSCI Inc. to reclassify Peru as a periphery country, potentially taking out billions of dollars of investment.

Buy-and-Hold Giants Are Killing Trading in Peru Stock Market

The problem, Cooper and most observers agree, is that Peru’s capital markets are dominated by four pension funds holding a total of 172 billion soles ($51 billion) in assets, 11% of which is invested in Peruvian equities. The funds, known locally as AFPs, ensure strong demand for any bond or stock listing, but because they tend to buy-and-hold, they crush volume. Habitat, Integra, Prima and Profuturo are the largest.

A case in point is Banco Internacional del Peru SAA, or Interbank, whose parent Intercorp Financial Services Inc., listed on the New York Stock Exchange in July and now has a $4.8 billion market cap. Intercorp shares that trade in Lima changed hands only 1,868 times last year, and Interbank, its main subsidiary, saw just 194 trades.

Buy-and-Hold Giants Are Killing Trading in Peru Stock Market

With as much as 60% of the shares listed on the Lima exchange sitting on the books of pension funds, it’s hard to get other money managers interested in the market, especially foreigners who need some volatility in prices to find good entry and exit points for their investments. The benchmark S&P/BVL Peru General Index has fallen a little less than 1% in the past year, while MSCI’s Emerging Market Index has returned more than 6% in that span.

Cooper argued in an interview in the Peruvian capital that the pension funds also ultimately hurt issuers by suppressing the trading that would be needed to bring about higher prices and greater market values. There hasn’t been a new IPO for a company locally since 2012.

The Lima Stock Exchange is looking at solutions.

Among them is a plan to tap firms similar to BlackRock Inc. to structure new long-only equity funds. The idea is that the AFPs would invest in these funds, which would have a mandate to trade the shares actively. AFPs already invest in funds to buy foreign stocks and local bonds, but don’t have a similar structure for Peruvian equities.

Cooper, a 51-year-old former finance minister, called the AFPs “whales in the pool” and said at the rate they’re growing the country will have to loosen restrictions on how much of their portfolios can be invested abroad or risk the possibility they’ll simply run out of options in Peru.

Solving the liquidity problem is of paramount importance because of the threat that MSCI could downgrade Peru to frontier status -- joining countries such as Vietnam and Nigeria -- from its current status as an emerging market. Investors with $12.3 trillion in assets track MSCI indexes, so the classification is critical to the country.

For now, Peru meets the basic requirements to keep its status, but only by a hair. In June, MSCI officials said that they could start the process to reclassify Peru as a frontier market if it falls short of having three stocks that qualify for the emerging-market index. At the moment, it has: Compania de Minas Buenaventura SAA, Credicorp Ltd. and Southern Copper Corp. A delisting of one would almost overnight set up Peru for reclassification, and even just a sufficiently big drop in volume could send it over the edge.

Buy-and-Hold Giants Are Killing Trading in Peru Stock Market

The exchange’s proposal to create equity funds for AFPs to invest in has met resistance from the industry, which sees the moribund trading volumes as primarily a problem for the bourse, not for funds or their clients. They also have reservations about outsourcing the management of assets to a third party when they’ve been doing it themselves for years.

“We’d have to be able to justify handing over the management of shares to someone else, and with a commission on top,” Jean Pierre Fournier, the deputy head of investments at AFP Integra, Peru’s biggest pension fund.

Fournier said he’d be more interested in hiring a fund to invest in assets such as small-cap stocks or private bonds, which AFPs are currently unable to purchase.

“We’re open to listening, but the main challenge is demonstrating how this vehicle can create value for our clients,” Fournier said by phone from Lima. “Whether there’s liquidity or not is a structural problem. The AFPs and their investment teams’ top priority is generating returns for their clients. Liquidity is a second-tier objective.”

Cooper and her deputy chief executive, Miguel Angel Zapatero, who previously structured equity funds for BlackRock and Barclays Plc, don’t see it that way. They’re desperate to get more companies onto the MSCI index by helping facilitate share sales and freeing up liquidity. Intercorp and Ferreycorp SAA are among the companies best placed to join the index, they said.

“The pension funds need to be persuaded that if they want to remain in this country, they need to create some sort of viability for the local capital markets,” Cooper said. “Their survival depends on it.”

--With assistance from Sydney Maki.

To contact the reporters on this story: John Quigley in Lima at jquigley8@bloomberg.net;Daniel Cancel in Sao Paulo at dcancel@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Brendan Walsh, Joanna Ossinger

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